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Top 10 New York Commercial Division Cases and Developments of 2017

In 2017, the New York Commercial Division continued to implement new rules and refine existing rules in order to streamline litigation in the court. The year also saw some key decisions by the Commercial Division as well as appellate courts reviewing Commercial Division cases that developed an area of commercial law or applied existing law to a new or interesting set of facts. We covered all of these developments in this blog. We present here brief summaries of the most salient Commercial Division rule changes and cases from 2017 with links to our blog posts that provide more in-depth coverage.

In Rushaid, et al. v. Pictet & Cie, et al.,[1] New York’s highest court, the Court of Appeals (overturning decisions of both the Appellate Division and the Commercial Division) ruled that a foreign bank’s “repeated, deliberate” use of correspondent bank accounts in the United States is enough to establish New York jurisdiction. Historically, a foreign bank’s use of correspondent bank accounts in the United States to facilitate wire transfers has not necessarily given New York courts a sufficient basis for jurisdiction over the bank.

In deciding to exercise jurisdiction, the Court of Appeals applied a two-pronged test of: (1) whether defendants purposefully availed themselves of conducting business in New York and (2) whether there was a substantial relationship between the transaction and the claim asserted. As to the first prong, the court reasoned that Pictet’s use of a New York correspondent account similarly reflected a “repeated, deliberate use that is approved by the foreign bank on behalf of and for the benefit of a customer,” which “demonstrates volitional activity constituting transaction of business.” As to the second prong, the court found that there was a “substantial nexus” between the transaction in question and the claim asserted. Disposing of defendants’ assertions that the use of New York bank accounts was “incidental” to the scheme, the court concluded that the complaint “easily” satisfied the nexus requirement. The court reasoned that since the money laundering could not have proceeded without the use of the New York correspondent bank accounts and since the money laundering was essential to plaintiffs’ claims, there was a sufficient nexus between the business conducted in New York and the claims being asserted.

2. Davis v. Scottish Re Group Ltd (Analyzing Rule 12A of the Rules of the Grand Court of the Cayman Islands)

In Davis v. Scottish Re Group Ltd,[2] the New York Court of Appeals held that Rule 12A of the Rules of the Grand Court of the Cayman Islands – which requires plaintiffs in a derivative suit to obtain leave of court based on a prima facie factual showing before proceeding – does not apply to claims litigated in New York courts. The Court of Appeals determined that Rule 12A is procedural rather than substantive, and thus should not be applied in New York under New York’s choice-of-law framework. The Court rejected the argument that Rule 12A is a substantive component of Cayman Islands corporate law because the rule “neither creates a right, nor defeats it,” but rather establishes the procedure by which a plaintiff must proceed in Cayman Islands courts.

In analyzing the proper classification of Rule 12A, the Court of Appeals identified four major indications that the rule is procedural. First, the rule applies to actions initiated by procedures that are unique to Cayman Islands courts. Second, the rule applies to all derivative claims litigated in Cayman Islands courts, not only to those involving Cayman corporations. Third, the Court noted that the drafters of Rule 12A could have expressly provided, but did not provide, that the rule applied to all derivative claims involving Cayman Islands corporations, regardless of forum. Finally, the Court of Appeals noted that enforcing Rule 12A in New York courts would raise several procedural ambiguities surrounding the process for obtaining leave from a Cayman Islands court before proceeding in New York. Following this decision, there still remain barriers to bringing Cayman-related derivative suits in New York courts – such as establishing standing under Cayman Islands common law – but plaintiffs will no longer have to make the factual showing required by Rule 12A before proceeding with their claims.

In Good Hill Master Fund L.P. v. Deutsche Bank AG,[3] the Appellate Division unanimously affirmed a judgment entered in the Commercial Division of over $90 million, a large portion of which included prejudgment interest at 21%. The judgment followed a nonjury trial before the Commercial Division. The case was brought by two hedge funds against Deutsche Bank in connection with Credit Default Swap (“CDS”) agreements. The First Department rejected the bank’s arguments that the hedge funds acted in bad faith by renegotiating the terms of the underlying securitized notes to the detriment of their CDS counterparty, Deutsche Bank.

As to the claim of bad faith, the court affirmed the Commercial Division’s finding that “Good Hill negotiated at arm’s length with Bank of America” and that Bank of America was free to accept or reject the allocation of the purchase price to the investment grade notes. The First Department further concluded that Good Hill had not violated any of the CDS governing agreements. The court noted that pursuant to the governing agreements, Good Hill could “pursue its own interests, even if it might have an adverse effect on [Deutsche Bank].” The decision is important because the court held that Good Hill could negotiate aggressively and pursue its own interests, even to the detriment of its CDS counterparty.

On February 2, 2017, the Appellate Division issued a unanimous decision in Gordon v. Verizon Communications, Inc. that may have significant consequences for non-monetary settlements of shareholder class actions in New York.[4] The Commercial Division rejected the putative settlement due to concerns about whether shareholders could benefit from the additional disclosures that were to be made. The First Department reversed and approved the proposed settlement. The court applied the five-factor test that the Appellate Division had adopted in Matter of Colt Indus. Shareholders Litig. (Woodrow v. Colt Indus, Inc.), 155 AD2d 154, 160 (1st Dep’t 1990), and added two new factors to that test. However, the court’s failure to clearly define which parties these two new factors are meant to protect—i.e., the shareholders or the corporation—may lead to confusion as future courts and parties seek to apply this revised standard.

The two factors added by the court are: whether the agreement is in the best interests of the members of the putative class of shareholders and whether the proposed settlement is in the best interests of the corporation. The First Department’s holding could usher in a new approach to reviewing non-monetary settlements of shareholder class actions. However, the lack of clarity between the best interests of the shareholders as opposed to the corporations may lead to some confusion as parties seek to craft settlement agreements that will withstand scrutiny under the First Department’s expanded Colt factors. It remains to be seen whether the Gordon decision will encourage more merger challenges to be filed in New York—as opposed to Delaware.

In NYC Loft, LLC v. Hudson Opportunity Fund I, LLC,[5] the First Department endorsed the practice of the appointment of a Special Litigation Committee (SLC) by a limited liability company (LLC) “at least where explicitly contemplated” by the LLC’s operating agreement. However, where the operating agreement does not explicitly provide for such an appointment or otherwise evince an intent to delegate core governance functions to a nonmember, the LLC cannot appoint an SLC that has authority over a major decision of the LLC.

In reaching its decision, the court found that LLCs are “creatures of contract.” It further noted that “[o]ne attraction of the LLC form of entity is the statutory freedom granted to members to shape, by contract, their own approach to common business relationship problems.” The court also recognized that “Article IV of the New York LLC Act makes clear that the operating agreement of an LLC governs the relationship among members and the powers and authority of the members and manager.” Based on this, the court found that where an operating agreement does not provide for delegation of decision-making authority to someone other than a member—e.g., an SLC—the court found the appointment of the SLC to be improper. However, the court also stressed that its decision does not mean “that the appointment of an SLC would in all cases be improper in the LLC context.” It noted that where an operating agreement allows for the appointment of an SLC, the court would enforce such an arrangement “in accordance with the same principles concerning the parties’ freedom to contract.”

In Fidilio v. Hoosick Falls Productions, Inc.,[6] the Commercial Division granted a motion to compel arbitration of a dispute relating to a short-lived reality TV show, Scrappers. The Commercial Division ruled that the arbitration clause in one agreement between Frank Fidilio, the show's creator, and Hoosick Falls Production, Inc. (“Hoosick”), the production company, required arbitration of Fidilio's claims against Hoosick brought under another agreement which was executed at the same time, by the same parties, governing the same subject matter.

The Commercial Division found that “[i]n the absence of anything to indicate a contrary intention, instruments executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction [shall] be read and interpreted together[,] it being said that they are, in the eye of the law, one instrument.” The court observed that a reference to the Participant Agreement in the Producer Agreement evinced “the intent of the agreements . . . to be read together.” With respect to transactions, the case highlights the importance of clarity when drafting arbitration clauses. Particularly where a transaction may involve multiple related agreements, parties should consider expressly setting forth the reach of an arbitration clause to avoid later disputes.

In Ace Decade Holdings Ltd. v. UBS AG,[7] New York’s Commercial Division dismissed a $500 million fraud suit brought by an investment holding company incorporated in the British Virgin Islands, Ace Decade Holdings Ltd. (“Ace Decade”), against the Swiss bank, UBS AG, for lack of personal jurisdiction and inconvenient forum. The Commercial Division found no basis to exercise jurisdiction over UBS for alleged fraud in connection with a financing deal negotiated in Hong Kong to purchase shares of a firm listed on the Hong Kong Stock Exchange. The Commercial Division further held that, even if the court could exercise jurisdiction over UBS, the causes of action lacked a substantial nexus with New York and, thus, dismissal was also warranted based upon the doctrine of forum non conveniens.

As to the personal jurisdiction analysis, the Commercial Division found that based on the “totality of the circumstances,” there was not a “substantial relationship” between the causes of action and any transaction by defendant in New York. The court reasoned that “the complaint describes a purchase by a British Virgin Islands company (Ace Decade) through a Chinese investment fund, of Shares regulated by Chinese law, denominated in Hong Kong Dollars and listed on the Hong Kong Stock Exchange.” Ace Decade’s relocation to New York before the investment was funded did not trigger long-arm jurisdiction, because UBS’s telephone and email communications to Ace Decade in New York “are not enough to exercise long-arm jurisdiction with respect to claims arising out of an entirely foreign transaction.” The court also dismissed the case on forum non conveniens grounds because China’s and Hong Kong’s interests in the lawsuit were greater than New York’s interest, and all relevant documents and witnesses were in Hong Kong.

In K9 Bytes, Inc. v. Arch Capital Funding, LLC,[8] the Commercial Division addressed whether a working capital agreement is a loan and therefore subject to usury laws. The court found that the answer depends on the type of claim that the Plaintiff has brought. In the context of a misrepresentation claim, the court determined that if a contract expressly purports not to be a lending agreement, plaintiffs cannot allege that they were misled because they thought they were indeed entering a lending agreement. The court reached a different result with respect to whether usury laws apply to the agreement. There, the court determined that it must look to the substantive provisions of the agreement to determine whether as a matter of law such an agreement is subject to usury laws.

9. New York Commercial Division Adopts Large Complex Case List Pilot Program

On October 23, 2017, the New York’s Chief Administrative Judge adopted the Large Complex Case List as a pilot program for the Commercial Division of the Supreme Court of New York County. Under this pilot procedure, a Commercial Division justice may designate a case for the Large Complex Case List, either sua sponte or by application of a party, if the case “addresses commercial claims for an amount no less than $50 million” excluding punitive damages, interest, costs, disbursements and counsel fees, or if the case “addresses matters of sufficient complexity and importance to warrant such designation.” Justices presiding over cases on the Large Complex Case List may require the parties to use hyperlinked briefs and electronic document depositories, and may refer the cases to special referees for discovery matters, special mediators, or settlement judges. The Large Complex Case List will be effective in New York County as of January 1, 2018. The Large Complex Case List was inspired by the creation of the UK’s “Financial List” designed for cases valued at £50 Million.

On October 11, 2017, the Chief Administrative Judge of New York’s Unified Court System amended Rules 10 and 11 of Section 202.70(g) (“Rules of Practice for the Commercial Division”) with respect to Alternative Dispute Resolution (“ADR”). These amendments focus on providing clients with sufficient information related to mediation and ADR, and setting a proper time frame for identifying a mediator. Both amendments are seen as ways to increase and improve the usage of mediation in the Commercial Division. Rule 10 now requires counsel to file a certification relating to ADR at the preliminary conference and each subsequent compliance or status conference. The amended rule requires counsel for each party to certify, “that counsel has discussed with the party the availability of [ADR] mechanisms provided by the Commercial Division and/or private ADR providers, and stating whether the party is presently willing to pursue mediation at some point during the litigation.” Rule 11 states that where appropriate, a preliminary conference order will contain provisions for the early disposition of a case, including directions for submission to the ADR program. The amended rule now provides that directions for submission to the ADR program are provided in the preliminary conference order, “including, in all cases in which the parties certify their willingness to pursue mediation pursuant to Rule 10, provision of a specific date by which a mediator shall be identified by the parties for assistance with resolution of the action.”

The amendments were first proposed by the Commercial Division Advisory Council. After public comment, they were adopted by the Unified Court System's Administrative Board. These amended rules are set to take effect on January 1, 2018.